The report and my guesses........Close but.....

[GoredHusker]

The economy broke because consumers couldn't afford to continue paying their bills as nondiscretionary spending items got higher priced (food and fuel).  What's to change it this time around?  Crude is ticking closer and closer to triple digits which means $3.50+ gas.  The meats are ticking if not already surpassing all time highs.  Do you really think it's going to take $4.00+ gas this time around considering how fragile our economy already is?  $4.00 corn didn't break things in 08'.  Rather it was the price of ethanol which couldn't be hedged that far out going down as ethanol plants bought too much $7.00+ corn.  This is why a lot of ethanol plants won't buy cash corn out more than 60-90 days.  If the market was really concerned about anything other than what percent return on my money can I make, then Dec 11 wouldn't be trading at a 70 cent inversion to March 11.   

Here's how I see it.  The first thing the gov't will do to relieve some of these prices is release CRP acres penalty free.  This will fail because as profitable as farming has been those acres would have already come out and the penalty paid if the acres were worth farming.  After this fails, the gov't will be forced to change the mandates on ethanol.  With China being the biggest U.S. debt holder, they carry some political weight.  In November, they saw food inflation of 4.4 percent.  I have a feeling they'll be putting some political pressure on our gov't with regards to food vs. fuel.

The dairy industry is working through record monthly cow kills, yet we're not seeing any demand rationing?  As has been pointed out in another thread, the $3.00 and $4.00 corn has pretty well worked its way through the system.  With the $5.00+ corn just entering the system, it's an entirely new ballgame.  Last year's corn was not the best of quality, so it took more corn to make the gallons of ethanol.  This year, we have really good quality corn.  As gasoline prices rise, consumers are going to use less and less gasoline.  If they use less gasoline, they'll in turn use less ethanol.  We're already beginning to see consumers shy away from meats as the coolers are filling up as the numbers fed drop.  With consumers consuming less meat, meat prices will then fall.  The consumer is not strong enough to pay high prices for both food and for fuel.  Something will give just like it did in 2008.     

[ag678]

I would agree that the path we are on is unsustainable, sooner or later we won't be able to pass commodity prices on to the consumer in the U.S. or worse yet consumers in China.  If that bubble burst watch out. 

As far as rationing I can see it from the dairy industry but who else?  Yes 4-5 corn has worked its way through the system but 2.35 ethanol 1.10 cattle and 90 hogs have worked its way into the system making $6 corn work.  I really question just as in 2008 if they prices are sustainable but if nothing changes we don't ration corn.

I would agree that if things get way out of hand and stay there for a little bit the government will come in and do something to ethanol.  The cure for low prices was government intervention I see no reason why the opposite couldn't happen.

Ethanol plants buying corn 60-90 days out probably has more to do with their financial position and their ability to margin short positions.  It isn't like the plants that are puting out bids for 2 years are just buying the corn hoping it will work, they are most likely hedging everthing they buy, by shorting the board against corn purchased.  They could also sell ethanol to offset their long postion but looking at forward margin probably not the case.

[Jim Meade / Iowa City]

How does the government meet Clean Air Act standards by pulling the rug out from under ethanol?  I agree the subsidy could and likely will go.  But the mandate is something else.  We all sense that the government attitude to the ethanol subsidy is political.

You are surely right that ethanol plants are hedging more sensibly now.  The blend wall may cause more problems than the government direct action.  We will see fuel blenders using every paper gallon they own if the price of corn goes up, so plants may not buy as many bushels of corn as the "gallons" of ethnol would lead one to believe.